Constellation’s big Canopy buy-in sent short-sellers scrambling in droves

Short-sellers appear to have covered their positions in Canopy Growth Corp. in droves last month after news that the Canadian pot producer had lined up a multi-billion-dollar investment from U.S.-based alcohol giant Constellation Brands Inc.

Data from global information provider IHS Markit shows that the number of Canopy shares sold short plummeted following word of the transaction, which could see Constellation increase its stake in the cannabis producer to more than 50 per cent. The deal was announced on Aug. 15, when the short interest in Canopy was approximately 19.3-million shares, the IHS Market numbers show.

That figure began to decline noticeably in the days that followed, reaching as low as 10.4-million shares, the lowest level since February. As of Aug. 30, short interest in Canopy stood at approximately 11.2-million shares, down about 8.1-million shares from the day the deal was announced.

During the same period, Canopy’s stock price rose nearly 80 per cent in Toronto.

“There has been some short covering in some of the best performers, most notably including an eight-million share reduction in Canopy Growth shorts over the last two weeks,” said Samuel Pierson, director of securities finance at IHS Markit, in an email.

However, Pierson added, “there has not been a mass move toward the exits on the part of Cannabis shorts up to this point.”

Alberta-based Aurora Cannabis Inc., for example, was still on the Toronto Stock Exchange’s list of the 20 largest short positions as of Aug. 15.

Short interest in Tilray Inc. rose from approximately 1.86-million shares to 2.15 million from Aug. 15 to Aug. 30, the IHS Markit numbers showed. Short interest in Cronos Group Inc. jumped from approximately 16.2-million shares to 17.2 million over that same period.

Indeed, the rapid price rise for cannabis stocks ahead of Canada’s legalization of recreational pot this fall has managed to keep the shares of some pot producers under scrutiny — and in the crosshairs of some short-sellers.

Last Thursday, U.S.-based Citron Research released an accusatory report on Cronos that targeted the disclosures the Canadian pot producer had made about its provincial distribution deals, among other things. Shares of Cronos closed around 28 per cent lower that day.

After the report was released, Cronos CEO Mike Gorenstein told BNN Bloomberg that the company was “very confident in our disclosure to the market.” A note from GMP Securities said that, “instead of creating hype, Cronos has been prudent and refrained from disclosing volumes which may or may not materialize.”

Shares of Cronos bounced back somewhat on Friday, gaining about 8.8 per cent to close at $12.81.

Steve Hawkins, president and CEO of Horizons ETFs Management (Canada) Inc., whose Horizons Marijuana Life Sciences Index ETF (HMMJ) loans out cannabis-related shares to short sellers, had a word of warning for those shorting the sector, which he remains bullish on.